More in Store for Retailers Who Rent

Historically, ownership was considered advantageous, but as commercial real-estate values decline, the opportunity to lower rents and drive down operating costs outweighs the ownership advantage.

In this note, we provide details on store ownership of companies in our universe, as well as total rent expense, and estimated earnings-per-share benefit from capitalizing on the decline in commercial real-estate prices. Multiple factors, including timing of lease, and location of real estate, will impact our estimated numbers, but we look more at this analysis as a safety valve.

In our scenario analysis, companies that have high real-estate ownership rates (i.e.,
Home Depot
(HD),
Lowe's
(LOW),
Wal-Mart Stores
(WMT),
Target
(TGT) and
Costco Wholesale
(COST)) have less earnings benefit due to a limited ability to reduce rents as leases come up for renewal.

We look at Williams-Sonoma, RadioShack, Office Max and Office Depot more favorably, as these companies have almost no square-feet growth, and are cutting their square feet by closing unprofitable stores, and shrinking store sizes. These companies generally have about 10% of leases (i.e., 25% for RadioShack) coming up for renewal annually, and we assume that adding up all the benefits of a renegotiation including lower rent, smaller stores, landlord financed remodels, and lower attachment costs (i.e., maintenance) -- these companies can lower rent by about 10% on the current class of lease renewals. These benefits should continue for several years.

Hhgregg in particular, was able to open a total of 40 stores in fiscal 2009 and fiscal 2010, and it is on track to open about 45 stores in fiscal 2011. These new openings represent about 50% of Hhgregg's total store base with the majority of new openings in the Northeast and Mid-Atlantic. Hhgregg has gotten favorable rents, while seeing new store productivity skyrocket -- a winning earnings combination.

Other growth retailers such as Tractor Supply, Lumber Liquidators, Staples and Best Buy (through Best Buy mobile) will also benefit from lower rents on new stores.

-- David Strasser -- Sarang Vora

To be considered for the Soapbox feature, please submit an original article of less than 1,000 words to research@barrons.comwith "Soapbox Submission" in the headline. Please include your daytime telephone number and credentials.

The opinions contained in Investors' Soapbox in no way represent those of Barrons.com or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.